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IAI Actuarial Core Principles · Business Finance · Regulation of financial reporting of incorporated entities

Which of the following most threatens the independence of an external auditor of a listed company?

Earning large non-audit consulting fees from the same client threatens independence by creating self-interest and financial dependence. Partner rotation, audit committee oversight, private meetings without management and compliance with auditing standards are safeguards that strengthen independence rather than weaken it.

  1. AThe audit firm rotates its engagement partner periodically
  2. BThe audit firm also earns large fees for consulting services from the same client, making it financially dependent on that clientCorrect
  3. CThe audit committee recommends the auditor's appointment to shareholders
  4. DThe auditor holds regular meetings with the audit committee without management present
  5. The auditor follows auditing standards when planning the audit

Explanation

Large non-audit fees create a self-interest threat and economic dependence, impairing independence. Partner rotation, audit committee recommendation, private meetings and following standards all support independence.

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